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As of Oct. 1, self-storage operators in the United Kingdom must charge rental customers a 20 percent value-added tax (VAT) as part of the government’s revised budget plan. The new law affects self-storage businesses that previously opted not to charge the VAT and applies to those with annual net revenues exceeding £77,000 (approximately $124,000). The British government expects the self-storage VAT to generate more than $56 million by 2015-16.

The self-storage VAT has been a source of controversy since it was introduced in March during a budget proposal made by British Finance Minister George Osborne. The VAT eliminates the U.K.’s self-storage market exemption and puts the industry in the same category as “traditional removal companies” and other businesses that provide storage services but not necessarily in secure units or “discrete areas,” as characterized by the government’s HM Revenue & Customs (HMRC) office.

“Around 30 percent of self-storage is currently taxed because of the option to tax. Some self-storage providers have never opted to tax but those that do are able to reclaim VAT on the costs of constructing or purchasing their storage facilities,” according to an information sheet released by the HMRC. “Some self-storage providers have used avoidance arrangements to convert their taxable supplies back to exempt supplies, gaining an unfair advantage over their competitors.”

The application of the VAT on self-storage could mean thinner profit margins for some U.K. operators and higher prices for rental customers. The affected self-storage tax base in the first full year of the measure is estimated to be about £200 million ($321 million). The HMRC estimates the VAT will generate an extra £15 million ($24 million) in taxes in 2012-13, increasing to £30 million ($48 million) by 2013-14 and exceeding £35 million ($56 million) by 2015-16.

The impact on storage customers could be minimized somewhat due to the high occupancy of storage units by businesses. “In the U.K., around 50 percent of our let space is taken by business customers, and we would expect the impact to be limited in this sector as many businesses will simply reclaim the VAT,” Safestore Holdings PLC officials said in March, after the VAT proposal was introduced.

Safestore owns about 100 self-storage facilities and manages another dozen in the U.K. market.

Similarly, officials at Big Yellow Group PLC, which operates 76 locations in the U.K., initially said the impact could be absorbed largely by business customers: “Approximately 30 percent of our revenue is derived from business customers for whom this change will be neutral, as the vast majority of them are able to recover VAT.”

However, in July, Big Yellow hinted it was considering legal action against the VAT. Any formal appeals against the tax could not be issued until after Oct. 1 when the VAT went into effect, according to news reports.

Another big player in the market, Lok’nStore, said it would not be affected by the proposal because it already charged customers the VAT.